As less people save for retirement and the population reaching retirement age continues to rise, we chat to a top economist to see what the next generation of pension planning will involve.

A recent report from Prudential revealed that over half of all Brits do not contribute at all to private or company pension schemes. As the population gets older - the number of people over 65 is set to increase from 10.9 million to 13.2million in 2026, with even more predicted to be close to pensionable age by 2040 – the working population is set to fall, and, a double-wammy, more of us will be hoping to live in retirement on a pension.

So, what does the future hold for pensions and retirement? We quizzed pensions expert and leading economist Erik Hurst, Professor of Economics and Neubauer Family Faculty Fellow at the University of Chicago Graduate Business School, about the future of pensions and retirement saving.

Is retirement a redundant term?

Retirement means that you give up your attachment to the labour force with the expectation that is permanent - most people do this at some point in their lives. But retirement can be flexible; you could be retired today and unretired tomorrow.

Given the decline in pension schemes, and given the success of former schemes for previous generations, would you say that what most of think of as a pension – saving while earning for a regular income on retirement – is misleading for future generations?

What you see more of now relative to other generations is innovation in pension design; companies have driven defined contribution plans in the last 15 years to bring about change. Many schemes automatically enrol you in a pension scheme – you can unroll, but most people don’t. So you see a different evolution in pension schemes, with firms themselves taking a much more proactive roll in how they are implemented in trying to get people enrolled on them. I’m a fan of these types of schemes. The best thing is that for people who have trouble in planning ahead you make that decision for them. If people don’t like it they can unroll from the schemes. It never hurts anyone who doesn’t like it, but these schemes do help those who need help in planning.

So, on that basis are you a fan of the Government’s plans to introduce personal accounts for the UK workforce? Read More: What are personal accounts?

Yeah, that scheme only helps people. The people that it hurts can always leave, but the people that don’t think about saving, essentially, those in a paternalistic sense who don’t think about saving for retirement don’t have to think about retirement.

Where do you see pensions in 30 years time?

What you are going to see are retirement ages rising in most countries, it’s inevitable. In the past pensions used to start at 65, but you were dead at 66. Now, as people live to their 80s, you are going to see people delay their pensions a few years. As people delay their pensions for a few years it reduces the burden on their pension savings and on public pensions. In places like the US you are also likely to see the phasing out of pension benefits for certain groups of people, such as the very rich. If you earn above a certain amount of money you will not be eligible to receive any income in retirement.

What do you think is likely to be an acceptable retirement age in the future?

It’s hard. Everyone would prefer to get lots of money and not work, so picking an acceptable age to retire is difficult. One thing no one ever talks about is the fact that if you are retired and pension poor, you are time rich. The amount of time people have now is huge relative to previous generations because people are living longer. So if there is some trade-off between time and money, making people work a little bit longer may reduce their time a little bit, but is likely to increase their money quite a lot.

Does raising the retirement age only penalise poor income groups who have to work to survive?

Yes. It is a way to cut benefits for people by making them work longer, without cutting their benefits in retirement. Again, you’d much rather not have your benefits cut, and essentially being forced to work another year is a cut in benefit, because they are taking that year or so of extra benefit away from you, to keep your remaining benefits for when you have retired at an acceptable level.

Your own research suggests that most people do plan for retirement; with this in mind do you think that the inheritance tax should be scrapped, as that wealth would find its way into the pension planning of the inheritors?

Inheritance tax has two affects. Inheritance tax essentially discourages me from accumulating wealth. But from the other perspective if you scrapped the tax it also reduces government revenues, so you have to decide which one is going to be bigger. It’s hard from a government point of view. From a rich persons point of view it is always better to have lower taxes and from a poor persons point of view it’s always better to tax the rich more. There’s always some group somewhere in the middle; as a society we are always somewhere in the middle.

If you were in charge of pension planning in the UK, what would you implement?

One thing I would consider is raising retirement ages and phasing out benefits for the wealthy. Those would be the first two things I would implement, if I needed more then I would have to consider taxing the wealthy more. In the US there is a kink where any earnings over $100,000 are exempt from social security benefits, so you could raise that somewhat and earn more money.

What would be the effect on the economy as a whole – and the stock markets inparticular – if people began shunning pension funds as retirement saving vehicles?

There is a fixed amount of money in the economy, there is a market that equates the returns across different assets, and if pensioners are bringing in that money then the money would likely go to pension funds, at least as much as it does today.

Find out more about the University of Chicago Graduate Business School at: www.chicagogsb.edu